Taxation of Advertising Income of Exempt Organizations

The Catholic Lawyer, Apr 2017

By Robert M. Spevack, Published on 04/06/17

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Taxation of Advertising Income of Exempt Organizations

Catholic Lawyer: Taxation of Advertising Income of Exempt Organizations' Robert M. Spevack Part of the Catholic Studies Commons, and the Tax Law Commons Recommended Citation Robert M. Spevack (1975) "Taxation of Advertising Income of Exempt Organizations' Publications," The - Publications Article 4 Follow this and additional works at: https://scholarship.law.stjohns.edu/tcl As you learned this morning, or probably some of you knew beforehand, the unrelated business tax was enacted in 1950. There was no action, at least on a public basis, involving application of the unrelated business of tax-exempt organizations' publications-of course, I'm talking about nonchurch organizations-until 1967. During this time, there were a lot of complaints from publishers of taxable magazines, newspapers, and periodicals of various kinds, saying that they were losing advertising revenue because of unfair competition from tax-exempt organizations. Whether or not this is true, I'm not really certain. In 1967, largely because of this sort of complaining, the IRS did publish regulations taking the position that, beginning essentially for 1968, the advertising income of exempt organizations' publications is subject to the unrelated business tax. However, they specifically said that the subscription income-that is, amounts people pay specifically for the publication-would not be subject to the tax. This went along for a couple of years, and there were a number of complaints that the IRS had no authority to break out the advertising income from the overall publication under the statute as it existed at that time. In the Tax Reform Act of 1969, where Congress did a lot of things about exempt organizations, permission was granted to the IRS specifically to the effect that any activity carried on for the production of income from the sale of goods or the performance of services may be an unrelated trade or business beginning with the taxable year of 1970. The committee reports, both in the House and the Senate, state that one specific target of this amendment was to allow the taxation of just the advertising income of exempt organizations' publications. Now, as you learned this morning, I'm sure, from several of the speakers, 1969 was when the taxation of churches was explicitly authorized beginning generally with 1976-that would be for next year. The Senate committee report on subjecting churches to the unrelated business income tax states that, in the case of churches, unrelated business income does not include the printing, distribution, or sale of pamphlets, tracts, calendars, papers, books, and magazines with substantial religious content, even though there is a small amount of advertising in the publication. It's not clear from this statement but he agrees with me, I think, on this. It's not clear from this statement as to whether they intended to exempt just the direct revenue from the sale of these specified articles, or whether they also intended to exempt the taxation of the advertising income of the publications. I think some of the concern behind this statement was concern that the IRS would apply in cases like Scripture Press, where an organization was held not to be exempt, because it was primarily in the business of publishing materials-in this case religious books for a Sunday school-making large profits. My own feeling about this is, while there is no official pronouncement on the subject as yet from IRS or anywhere else, that this exception will not probably extend to advertising income, per se. Now, as far as the regulations as they existed during 1968 and 1969, there is a recent case involving the Massachusetts Medical Society-again, it's a professional association, where most of these problems tend to come up-which holds the regulations issued in 1967, prior to the effective date of the Tax Reform Act, are invalid for 1968 and 1969, on the basis that the definition of unrelated trade or business prior to the 1969 amendment I just discussed, did not permit the IRS to separate advertising from the publication as a whole, and also interestingly, came up with the 1956 GCM, which is a General Counsel Memorandum issued by the IRS Chief Counsel's office, which indicated that Congress had not intended in 1950 to tax advertising income of exempt organization publications. As a result of the 1969 Tax Reform Act, in 1971, the IRS published new proposed regulations on advertising income. They essentially followed the format of the 1967 regulations and they also attempted to deal with some of the problems that came up in connection with these 1967 regulations. Some of you, I think, might have been involved with this and have done some reading on the subject, or started to look at a Form 990-T, and wondered what your clients, associates, etc., were likely to get into next year and really blinked a little. Basically, the formulation-I'll get into a little more detail and explanation later-involves taking your gross income (...truncated)


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Robert M. Spevack. Taxation of Advertising Income of Exempt Organizations, The Catholic Lawyer, 2017, pp. 4, Volume 21, Issue 4,